I recently read an article that
contained some excellent information about Sort Sales and how they work. Since
I have been asked by any people over the course of the last few months about
Sort Sales, I thought I would share what I found.
As many as 25 percent of homeowners nationally owe more on
their mortgages than what their property is worth. The Mortgage Bankers
Association reports that approximately 4.2 million homeowners missed at least
one month’s payment during the second quarter of 2010, and more than two
million were in foreclosure by the end of the quarter.
Between four and five million mortgages are in difficulty,
with the prospect of foreclosure filings reaching three million in 2010. Short
sales are a growing trend among lenders and homeowners seeking to avoid
In a short sale, the lender agrees to accept the sale’s net
proceeds as complete payment for the existing debt, even if it is “short” of
the full amount.
Short Sale Basics
A short sale, also known as a pre-foreclosure sale, is a transaction
in which the lender (or lenders) agrees to accept the proceeds of the sale in
lieu of the total debt owed by the current homeowner. By definition, the net
sale price in a short sale will be less than the total debt balance and the
lender(s) may or may not forgive the difference. The current owner/seller
receives none of the proceeds of a short sale, which go entirely to pay off the
debt(s) on the property. Owners may favor a short sale rather than a
foreclosure because of the potentially reduced impact on their credit ratings
and their personal financial conditions. A short sale can be initiated even after
posting of a Notice of Trustee Sale but before the actual foreclosure sale.
Short sales are a viable option when the current homeowner cannot
qualify for a loan modification or refinance, if the property will not sell for
enough to cover the existing loan and if there are no other prospects to pay
the mortgage. In such cases, foreclosure is highly probable or imminent.
A “strategic” short sale, that is, if the owner has the
capacity to make the mortgage payments but chooses not to because the loan is
greater than the current value, is not really an option.
The lender would expect the borrower to keep the loan
current and would pursue a deficiency if the borrower did not. Getting a lender
to approve a short sale is primarily a matter of economics. Lenders
increasingly favor short sales to avoid the more costly and time-consuming process
of foreclosure and sale. One survey found that short sales may reduce loss severity
by 13 percent, and in states where the foreclosure process is particularly
lengthy, losses may be as much as 26 percent less.
For the past couple of years, lenders have hesitated to
pursue many troubled home loans and underwater borrowers, thus prolonging the
soft housing market and further eroding property values. The lenders simply
could not afford the losses or lacked sufficient administrative capacity to
process the volume of problem loans. The government provided numerous forbearance
options, from mark-to-market accounting changes to foreclosure moratoriums and
loan modification programs, to help forestall the swell of home evictions.
But many lenders, especially the larger banks and Freddie
and Fannie, now recognize that loan modifications and refinancing is not going
to solve the majority of problem home loans. Alternative exit strategies are
Fueled by the severity of the housing bust, HAFA and general
market acceptance, there is a growing movement toward proactive short selling
rather than the reactive approach most lenders historically followed. Lenders
are much more receptive to a cooperative approach involving the homeowner, the
loan servicers and the real estate agent moving the property through the process
as quickly and profitably as possible. Lender acceptance of short sales is
greater in judicial foreclosure states with lengthier, more costly foreclosure
processes than in non-judicial foreclosure states, like Texas, where
foreclosures are less time consuming and less costly.
Every short sale differs depending on the local market, the lender,
the property, the seller, the buyer and the degree of presale work done.
Sellers benefit from engaging an experienced real estate agent to assist them
through the process.
Doing so avoids costly delays and mistakes. Agents with
prior short selling experience know what lenders are looking for, how to
collect the necessary documentation and data, and who to approach to get the
sale accepted. The seller may also seek out specific legal and tax advice for
protection, as the consequences of a short sale can be complicated.
Not all sellers will qualify and receive lender approval for
a short sale, and not all lenders will accept a short sale or discounted payoff
if and when it is offered. A homeowner considering a short sale should contact
the loan servicer or lender to pre-approve the arrangement, including setting
the minimum acceptable price and any other terms rather than first obtaining an
offer and then trying to get it accepted.
Qualifying for a short sale typically requires that all of the following conditions exist:
• The home’s current
market value is less than the debt. If this were not the case, the lender
would favor foreclosing and selling for a greater price. This step requires
recent market data and comparable sales to substantiate the expected sale
price. It may be expeditious to indicate that the net proceeds from a short
sale are expected to exceed those of a foreclosure sale.
• The mortgage is in
or near default. Historically, lenders would not even consider a short sale
unless the loan was substantially delinquent and in default. In today’s
economic conditions, some lenders will approve a short sale for a property that
is current but in imminent danger of defaulting.
• The seller has a
true hardship with little hope of bringing or keeping the loan current or
of being able to make up any deficiency between the net sale price and the
amount of the debt. Examples of hardship include loss of job or income,
divorce, medical costs, emergencies or sudden debilitating illness, bankruptcy,
The seller’s wish to get out from under the loan is not
• The seller has no
other assets with which to pay back all or part of the debt. The borrower
generally provides a full financial statement, balance sheet, tax returns and
bank statements to document the absence of other financial resources.
• The borrower is
unable to qualify to modify or refinance the loan. Most lenders would
rather modify or refinance a loan so the owner can afford the monthly payments and
remain in the home rather than having to settle for repayment of less than the
full loan amount. The HAMP and HARP programs were initiated for this very purpose.
Once the seller has qualified, a short sale typically
proceeds like any other sale except that the lender, not the seller, controls decisions.
The property is marketed and offers to buy the property are obtained. The
seller forwards each purchase offer to the lender, who accepts the best offer.
The deal closes, and the lender receives the net proceeds.
While these steps seem simple, the timing, corporate bureaucracy
integral to lenders and servicers, and the degree of documentation required
often cause the short sale process to take weeks or even months longer than a
typical sale. Today, most lenders are overwhelmed by the volume of problem
loans, foreclosures, workouts, and modification requests as well as short
sales. Many simply lack sufficient staff with experience, training or the
capacity to make timely decisions. Even after receiving a valid sales contract,
it may take anywhere from 30 to 120 days or more to get final approval from a lender.
The lender controls contract acceptance as well as the
sale’s terms and conditions. Lenders may consent to a short sale but then
refuse an offer as insufficient if they disapprove of the price. Even if an
offer is accepted, the purchase contract may specify that the property may
continue to be marketed prior to closing to obtain other offers.
All short sale contracts include a contingency whereby the lender
must approve all aspects of the sale. For example, while a buyer will want to
have the property inspected for physical condition of the operating systems
(heating, air conditioning, sprinkler system), neither the lender nor the
seller have any incentive to repair or fix any defects found. Therefore, most short
sales are “as is.” Lenders can accept any offer at any time
Owners may favor a short sale rather than a foreclosure
because of the potentially reduced impact on their credit ratings and personal financial
conditions. for a higher price. If a prospective buyer has spent any money based
on the original acceptance — for property inspection fees, for example — the
buyer may discover their deal has been rescinded with no recourse to recoup the
Lenders may reject a short sale request for any number of reasons,
but the most common are:
• Price is too low. The lender will always request either a full
appraisal or at least a broker’s price opinion much the same as if it were
making a new loan on the property. If the lender believes it can make more
money by selling the property through foreclosing, it will reject the short
• Short sale documentation package is incomplete, deficient or
lost. The paperwork for the short sale is every bit as demanding as for a new
loan request and sometimes even more so. One of the most common delays comes from
the lender losing, misplacing or never receiving a document(s) that causes
delay or even refusal.
• Seller does not qualify. While it is advisable to get
preapproved for a short sale, some sellers wait until after procuring a
potential buyer or listing the property with a broker. Some lenders do not want
to pre-approve and prefer to wait and examine a specific deal. Either way, the
seller will need to meet the qualifying criteria.
• Buyer does not qualify. As is the case in underwriting a new
mortgage loan, the lender wants to make sure the buyer is going to be able to
close the deal if approved. A loan prequalification letter or preapproved home
loan from the buyer’s lender may be required to satisfy the seller’s lender.
• Lender no longer owns the loan. Sometimes, banks and other
lending companies may not realize that they no longer own the loan, even though
they may still be servicing it. If they are not the owner, they may lack the
authority to approve the sale. This particular problem can be avoided early on
by requesting the title company to check for an assignment of deed of trust or
other documents reflecting ownership of the loan.
• Junior lien holder refuses to accept the sale. More than one
loan on a property will complicate the process unless there is complete
agreement and cooperation between the first lender and the second. In many
cases, the short sale will not cover the total debt in the first mortgage; much
less encompass all of the debt secured by the home.
Second lenders may require a minimum percentage of the sale
price, a new promissory note from the seller or some other inducement to
release their liens on the property.
As with any real estate transaction, the best action any
party can undertake is to read and understand the entire agreement.
For a short sale, buyers and sellers and real estate agents
should be knowledgeable about all of the various clauses in the listing and
purchase agreements, as they may differ from a normal sale transaction.
Buyers generally expect to acquire short sale properties for
a substantial discount over current market price.
For some buyers, transaction time alone for short sales may warrant
a substantially discounted offer. The lender may wait for additional offers,
selecting the highest bid price even if it was submitted later than another
Buyers and their real estate agents can conduct some
preliminary research to make the process easier.
First, find out if the property has been preapproved for a short
sale or if the seller is initiating the qualification process based on the
purchase agreement. Find out as much as possible
In a short sale, the property is sold for less than the debt
owed on it. The lender accepts the net sale proceeds as payment in full. Short
sales may be less costly for lenders, and therefore are seen as a viable option
in deteriorating markets where the current borrower has no other prospects to
cover the loan amount.
Short sales are more complex and time consuming than normal
sales about the seller’s short sale status with the lender, who the lender is,
and if there is more than one mortgage on the property. Buyers may even
consider submitting a copy of the purchase agreement and earnest money deposit
to the lender directly.
If there is more than one loan, does the junior lien holder have
the authority to hold up or stop the transaction? Do the lenders have an
agreement as to how the short sale is going to be handled?
If possible, buyers should examine local area comparable sales
data to estimate current prices, including foreclosure sales and other short
sales. The lender will have this information and use it to make its acceptance
decision. Buyers looking for exceptional discounts may be disappointed.
Short sale properties are sold “as is” upon closing, which may
be several months in the future. So most if not all repairs are the buyer’s
responsibility. This should be factored into the offering price.
Short sales are generally the “next-to-last” option owners and
lenders have before foreclosure. From the seller’s standpoint, the short sale
offers a way to get out from under the loan and start over.
Sellers generally expect short sales to have a much less
dire effect on their credit rating than a full foreclosure action, but that may
not always be the case. The effect depends a great deal on whether the loan was
delinquent, and by how long, before the short sale, how the lender reports the
whole process to the credit rating agencies, and whether or not the owner
defaults on other credit obligations. Ideally, the seller is not subject to a
deficiency judgment, but that is at the discretion of the lender(s).
Short sales and deeds in lieu of foreclosure, represent “not
paid as agreed” accounts, and are considered the same as foreclosures in
computing a FICO score. Any of these options, however, are better than a
bankruptcy, which has a greater negative impact.
While the effect of a short sale remains on the credit
report for seven years, the impact on scores can begin to diminish after just a
couple of years as long as it remains the only blemish
Fannie Mae and Freddie Mac recently issued statements saying
short-sale sellers could be eligible for new loans backed by either agency
within two years rather than having to wait seven years after a foreclosure.
Historically, a debt forgiven for less than the full amount would
produce taxable income for the borrower. However, many debt deficiencies
currently are exempt from federal taxes under the Mortgage Forgiveness Debt
Relief Act of 2007. In general, if the home is the borrower’s principal residence,
the amount of difference between the price and the amount owed is not taxable.
However, unpaid junior liens may be a different story. Sellers need to consult
with a tax advisor to understand all tax effects.
If you need more information on the Short Sale Process email
or call me directly @ 832-576-4902 or you can visit my website for more Short Sales information